Leo, Kesho and Kutwa trade in electrical goods and as partners in Leo
Unincorporated. They share profits and losses equally. The following details in the
draft accounts regarding their profit and loss status as at 31 December 2005 have
been provided:
Debits
Sh.
Credits
Sh.
Office expenses
General expenses
Salaries and wages
Show room expenses
Rents, rates and taxes
Printing and stationery
Instalment tax paid
Advertising
Legal charges
Interest on capital
Depreciation
Bad debts
Commission to partners
Donation for poverty
Property taxes
Electricity expenses
General reserve
408,000
188,000
560,000
234,000
300,000
128,000
90,000
146,000
164,000
420,000
184,000
136,000
160,000
200,000
24,000
92,000
240,000
Gross profit
Interest earned
Discounts received
Other receipts
Rent income
Capital gain on shares.
2,600,000
240,000
160,000
300,000
264,000
200,000
The partners provided additional information as follows:
1. Closing stock had been understated by Sh.30,000 as at 31 December 2004.
2. Leo was paid Sh.100,000 as salary (included in salaries and wages) and PAYE
Sh.31,000 was paid on it.
3. The firm was fined Sh.30,000 for breach of regulations. This is included in
legal charges.
4. Interest on capital was Sh.160,000 to Leo, Sh.120,000 to Kesho and sh.140,000
to Kutwa.
5. Commission to partners include sh.90,000 to Leo and the balance to Kutwa.
6. Capital allowances had been agreed at sh.1,800,000 with the tax authorities.
Required:

(a) Compute the total income (loss) from the partnership business.
( 9 marks)
(b) Show allocation of profit/loss among partners.
( 4 marks)
(c) How is the profit/loss of each partner to be treated for tax purposes?
( 2 marks)
(d) Specify five matters you are likely to question on the above accounts and state
why. ( 5 marks)